THE LOCAL stock barometer is seen to test the record high level of 8,127 this year on the back of “rock-solid” underlying macroeconomic backdrop and Pres. Rodrigo Duterte’s commitment to higher infrastructure spending, local investment house First Metro Investment Corp. said.
This year, corporate earnings are likely to grow by 13.5 percent and sustain growth within the mid- to high-teen levels next year, FMIC assistant vice president Cristina Ulang said in a press briefing yesterday.
Ulang said Mr. Duterte’s “quite aggressive” plan to boost infrastructure spending to 5 percent of gross domestic product (GDP) would be a strong catalyst for the market. The government has not seen such kind of infrastructure spending since the Macapagal-Arroyo administration, she said.
During the Aquino administration, infrastructure spending fell to as low as 1-2 percent of GDP before rising to 3.5 percent last year.
The strong rally seen by the market this year, Ulang said, was partly due to the positive impact of the presidential elections on the economy alongside its already strong foundation, making the local stock market more resilient to headwinds arising from Britain’s decision to exit the European Union (Brexit).
“Our earnings growth is not as impressive but we continue to have good fundamentals on account of low inflation, good liquidity in the system and strong banking system with sufficient capitalization which are supporting earnings growth moving forward,” she said.
But this year is particularly a “special” year given that elections – based on history – always boosted the economy.
Every first quarter of all four past election years had seen a 7.3 percent quarterly growth in expenditure compared to an average of only 4.5 percent during non-election years. The quarterly GDP upside for the second quarter typically averaged at 8 percent compared to only 4.8 percent during the non-election years, Ulang noted.
At the same time, the increase in the Philippines’ weight in the closely tracked MSCI index and the inclusion of Security Bank in the main index had likewise boosted investors’ confidence alongside rising bets that the US Federal Reserve may not longer hike interest rates too soon.
“This is one basis why the stock market has flown to where it is now,” she said.
Since the start of the year, the PSEi had gained a total of 913.19 points or 13 percent from the end-2015 finish of 6,952.08. As of yesterday, it closed at 7,865.27. The record-high level of 8,127 was posted in April last year.
At present, Ulang said local stocks had become expensive relative to peers in the region, but noted that as higher GDP growth boosts corporate earnings, she said valuations would become more reasonable. FMIC expects the country’s GDP expected to expand by 6.5-7 percent this year and further to 7-8 percent next year.
Investors are now paying around 19 times the amount of money they expect to make this year, higher than the 14-15x price to earnings ratio elsewhere in Southeast Asia.
Given that the overall market was now fully valued, she said the challenge to investors would be to do their homework in stock picking, focusing their attention on stocks that deliver double-digit earnings growth, good dividend yield, low valuation and strong balance sheet.
Among conglomerates, FMIC prefers Metro Pacific Investments Corp., GT Capital Corp. and SM Investments Corp. For the consumer play, FMIC likes retailer Puregold Price Club and leading canned food producer Century Pacific Food Inc.
In the property counter, FMIC favors Ayala Land Inc., SM Prime and Megaworld Corp. while in the power sector, it likes Semirara Mining & Power Corp., Aboitiz Power and Manila Electric Co. FMIC also likes the technology space, citing as Xurpas as its top pick in this sector.
Moving forward, Ulang said key risks for the market include high valuation, mixed earnings growth and execution risks on Duterte’s agenda. External risks, on the other hand, still include Brexit uncertainties, US Federal Reserve policy shifts, global market volatility, China’s economic slowdown and various geopolitical tensions.